Western financial support to the budding “democracy” in Egypt so far has been tentative.
A much-heralded speech by President Barack Obama on the Arab spring last month generated headlines of a $2bn pledge from the US. In reality, US support will take the form of a bond guarantee (such guarantees were also granted to the previous regime), a debt swap (not a write-off) and a promise of further lending to the private sector through the Overseas Private Investment Corporation.
There were no grants or direct lending to help shore up Egypt’s battered public finances.
Similarly, the G8 declaration in Deauville did not commit any cash to Egypt, instead promising a “partnership” in which $20bn of multilateral funds could be made available over three years “in support of suitable reform efforts”. True, the IMF is about to provide $3bn, but that is only for the coming year, and in the greater scheme of things is fairly limited.
Egypt needs $12bn to fund its current account deficit this year, and $23bn to fund its budget deficit — and that is just to make ends meet. Much more is needed to lift the country from crisis and help meet the ramped-up economic aspirations of its people. So why is the west, champion of democracy, so hesitant to put its money where its mouth is?
Part of the reason surely has to do with the slashing of foreign aid budgets in industrialised countries at a time when fiscal austerity measures are biting at home. But the reticence may also reflect the west’s suspicion of the kind of government Egypt’s “revolution” may yield.
Indeed, making future financial support contingent on Egypt attaining a “free, democratic and tolerant” society is a statement of intent: first show us you won’t bite our hand, then we will feed you.
From a western perspective, this hesitation is not unjustified. Later this year, the Egyptian people will vote in a government that should reflect more closely their own political views.
The Muslim Brotherhood, recently confirmed as a political party for the first time, is expected to make significant gains.
But regardless of the make-up of the new government, it will be under intense pressure to right the perceived wrongs of the Mubarak era.
On the economic front, this means a greater emphasis on social justice, and a binning of the market reforms that earned the Nazif government accolades from the international financial community. On the political front, this means greater plurality in politics at home, but it also means greater independence in foreign policy. This is where western concerns lie.
Since the removal of Mubarak in February, Egypt’s political orientation has become markedly less aligned with US and western interests. A tentative rapprochement with Iran is under way, and relations with Israel appear strained over a gas-contract dispute and a reopening of the Rafah border crossing into Gaza.
The Muslim Brotherhood and some potential presidential candidates have called for a review of the Camp David peace agreement between Egypt and Israel. Egypt also played a role in reconciling Hamas and Fatah in the Palestinian territories, an important step in the run-up to a Palestinian bid for statehood at the UN in September.
A democratic Egypt, in other words, may well be at odds with western foreign policy. That the west and the multilaterals they control will be willing to provide help to a country transitioning towards greater hostility towards them seems, in our view, unlikely.
There are alternatives to Western financing. Egypt could lean on its local banks more, but this will shift the burden of fiscal adjustment to the banking sector, crowding out private lending and reducing economic growth. Regional cash-rich governments, such as Saudi Arabia and Qatar which have pledged $14bn to Egypt, appear eager to help, with an interest in maintaining regional stability and also limiting Iran’s influence.
But the main advantage of multilateral and, to an extent, western lending, is that it comes with significant economic conditionality. This would provide a much-needed external anchor to public finances and economic policy, which will be under immense pressure to deliver on social justice. An independent foreign policy in Egypt therefore spells significant economic and fiscal risks.
Farouk Soussa is chief economist for the Middle East at Citigroup
